German Bondholders Rebuffed by 7th Circuit

CHICAGO (CN) – Owners of pre-World War II German bonds that the German government deemed invalid cannot find relief in U.S. courts, the 7th Circuit ruled. After World War II, West Germany agreed in treaty known as the 1953 London Debt Agreement to pay valid debts outstanding predating the war. Foreign bondholders could not receive payment, however, without submitting their claims to a German panel that determines bond validity. The suit at hand involves plaintiffs seeking recovery on pre-World War II German bonds without first obtaining that validation. One holder never submitted the bonds to a validation panel, and the other did not seek review of the decision before a German court after his were found ineligible. The 7th Circuit found the “attempt to get around this sixty-year old treaty unavailing.” “The Constitution’s fifth amendment does not forbid the taking of private property,” Judge Frank Easterbrook wrote for the three-judge panel. “Instead it requires just compensation for taken property. The Tucker Act authorizes the Court of Federal Claims to award whatever compensation the Constitution requires. It follows that the 1953 Treaty cannot be unconstitutional as a prohibited taking. A person who thinks that the 1953 Treaty takes private property should use the Tucker Act remedy.” Just as the United States is not responsible for Iran’s failure to pay foreign nationals claims against it, the United States is not responsible to pay Germany’s debts if the nation refuses to honor the bonds, according to the ruling. “Diplomacy requires compromise,” the seven-page opinion states. “Many governments are reluctant to pay debts incurred by predecessors that have been overthrown in revolution (e.g., Iran) or lost a war (e.g., the Nazi regime in Germany).” (Parentheses in original.) The diplomatic compromise reached in the treaty is therefore an “ordinary part of peacemaking and not an affront to the Constitution,” Easterbrook added. If, as the plaintiffs claim, Germany has not lived up to its obligations under the treaty, “that contention should be made to the Department of State, rather than to a district judge,” the ruling states. Easterbrook concluded: “It is far from clear to us that Germany has fallen short of its commitments; Examining Agencies still exist in Germany, and judicial review of adverse decisions is available. But because this treaty is not self-executing, diplomatic rather than judicial channels are the appropriate ones for consideration of plaintiffs’ grievances.”